People use debt in the form of loans to fund big purchases like that of a house or a car. Sometimes loans are used to fund big one-time expenses as well; for example, a wedding. Of course, loans are also a great source of capital for your new business.
However, while loans are useful financial tools when used properly, they can cause you a lot of trouble as well. Loans generally come with a lot of terms and conditions. Borrowing without a clear understanding of these terms may lead to acquiring too much and falling into debt.
Additionally, there are many criteria you must meet to qualify for a loan, to avoid being rejected. Thus, it is essential to understand the terms, conditions and eligibility of these loans, before applying for them.
Key Loan Elements
Let’s take a look at the vital loan elements you need to understand before you can apply for a loan:
- Principal: This is the total amount that you are borrowing from a lender and the minimum amount you agree to pay back.
- Term: This is the duration of the loan or the period within which you must repay the loan. Different types of loans have different term periods. Credit cards are said to be revolving loans, which means that you can borrow and repay as often as you desire without having to apply again.
- Interest Rate: This is the amount the lender charges you to borrow the money. It is usually a percentage of the principal amount. This amount may vary as well based on your creditworthiness.
The interest is often expressed as an annual percentage rate (APR), which can be deceiving. This is because the APR doesn’t account for the compounding interest paid over several periods.
Additionally, even if the loan amount is the same if the term or the interest rate varies, the total amount you repay will be different. Thus, the lower the interest rate and term period, the better it is.
Additional Costs On Loans
Apart from the interest rate, you may also have to pay additional fees on loans. The types of fees vary based on the lender. A few of the most common types are explained below:
- The application fee is paid to apply for a loan.
- The processing fee is paid to process the loan.
- The origination fee is the cost of securing the loan.
- The annual fee is paid at the end of a year, mostly for credit cards.
- The late fee is for when you aren’t able to pay the loan instalment on time.
- The prepayment fee is paid when you manage to repay the entire loan amount before the end of the term.
Most loans have one or the other of these fees. They will be mentioned in the terms and conditions of the loan application. Be sure to check them before you apply.
Qualifying For The Loan
Now that you know the terms and costs associated with loans, you must understand how you can qualify for a loan. Many factors affect the approval of a loan application. These include your credit history and score.
Your credit history tells lenders how you have used loans in the past, and how well you have repaid them. So it’s best to confirm your credit score before applying for the loan.
Additionally, you will also have to provide proof of income to show that you can repay the loan. It can be hard to justify any outstanding claims, so always be sure to clear them before you apply.
Remember to check these factors before you apply for a loan. Of course, in case you have a bad credit score, many lenders offer loans with no credit check.
Possible Reasons For Loan Cancellation
Now you’ve qualified and applied for the loan, but you cannot expect that your loan application will just be accepted. It may be cancelled at the eleventh hour. Here are a few of the possible reasons for such a cancellation:
Bad Or Limited Credit
As mentioned before, your previous credit plays an essential role in your loan application. Defaulting on loans or credit cards, applying for too many loans at once, and not having enough proof that you use debt wisely all affect your credit score negatively, and might be a reason for cancellation.
Providing proof of income is an essential part of a loan application. Most loans have a minimum salary as an eligibility criterion. So, calculate what payments you’ll need to make and if they’ll be manageable on your income to avoid a last-minute cancellation.
Dubious Loan Purpose
Most loans come with a restriction on what you can use the money for. This is applicable even on a personal loan, which allows the most freedom on the use of the funds. You cannot be using the money on anything illegal or non-credible if you want your loan application to be accepted.
You must provide accurate details on your loan application as lenders verify these details. If inconsistencies are found, your application may be rejected.
Your credit application may be rejected if you cannot provide proof that you have a steady income and can repay the loan on time.
Too Many Loans
If you are already holding too many loans and are in a lot of debt, it’s very likely that the bank will reject your loan application.
Low Value Of Secured Assets
When applying for a secured loan, you must provide collateral that meets certain conditions. If the property that you are using as a guarantee is old or not in good condition, your loan application may be cancelled.
To sum up, your credit score and history play an important role in the approval of your loan application. In case of a weak credit profile, you might want to consider no credit check loans uk.
Additionally, you must have a clear idea of what you are going to use the money you borrow for and provide proof that you can actually repay the loan before you apply for it. Otherwise, your loan application may just be cancelled.